Journal of Finance and Accounting
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Journal of Finance and Accounting. 2022, 10(1), 1-6
DOI: 10.12691/jfa-10-1-1
Open AccessReview Article

Evolution of the CAPM: From “Premium for Risk” to “Sharp-Linter-Black Model”

Huseyin Yilmaz1,

1Department of Accounting and Finance, Faculty of Economics and Administrative Sciences, Bilecik Şeyh Edebali University, Turkey

Pub. Date: February 07, 2022

Cite this paper:
Huseyin Yilmaz. Evolution of the CAPM: From “Premium for Risk” to “Sharp-Linter-Black Model”. Journal of Finance and Accounting. 2022; 10(1):1-6. doi: 10.12691/jfa-10-1-1

Abstract

The evolution of the Capital Assets Pricing Model (CAPM) started with the Williams [1] with the formula of “Premium for Risk”. Then, Hicks [2] and Markowitz [3] gave some opinions about risk premium and the value of an individual financial asset, respectively. Then, Treynor [4] and [5] brought some contributions to the model such as risk premium for equity and present price of a share. Sharp [6] added to the model the expected rate of return and he also transferred the standard deviation from statistics to the CAPM evolution. Linther [7] gave another risk premium approach with a different formula. Mossin [8] continued to improve the CAPM with his contributions of expected rate of return on a unit of a risky asset, return of a unit of a riskless asset, and the risk margin formulas. Black [9] completed the CAPM evolution with his model called “Sharp Linther Black Model”.

Keywords:
the CAPM risk premium beta standard deviation variance covariance Williams Hicks Markowitz Sharp Linther Mossin Treynor Black

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References:

[1]  Williams, J.B. (1938), The Theory of Investment Value, North Holland Publishing Company, Amsterdam, Netherland.
 
[2]  Hicks, J.R (1939), Value and Capital, Oxford University Press, Second Edition, Great Britain.
 
[3]  Markowitz H. (1952), “Portfolio Selecting”, The Journal of Finance, Vol.7, No.1, pp.77-91.
 
[4]  Treynor J.L. (1961), “Market Value, Time, and Risk”, Unpublished manuscript, “Rough Draft” Dated 8.8.1961, 95-209, pp.1-45.
 
[5]  Treynor J. L. (1962), “Toward A Theory of Market Value of Risky Assets”, Rough Draft, Revised 12/28/02, with minor edits by Craig William French, pp.1-19.
 
[6]  Sharp W. (1964), “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk”, The Journal of Finance, Vol. 19, No. 3, pp. 425-442.
 
[7]  Linther J. (1965a), “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets”, The Review of Economics and Statistics, Vol. 47, No.1, pp.13-37.
 
[8]  Mossin J. (1966), “Equilibrium in a Capital Asset Market”, Econometrica, Vol. 34, No. 4, pp. 768-783.
 
[9]  Black F. (1972), “Capital Market Equilibrium with Restricted Borrowing”, The Journal of Business”, Vol.45, No.3, pp.444-455.
 
[10]  Fama E. and French R. (2004), “The Capital Asset Pricing Model: Theory and Evidence”, Journal of Economic Perspectives, Vol.18, No.3, pp.25-46.
 
[11]  Linther J. (1965b), “Security Prices, Risk and Maximal Gains From Diversification”, The Journal of Finance, Vol.20, No.4, pp.587-615.